Ailing security companies may get lift

Internet worm highlights poor stock performances

By

ThomCalandra

SAN FRANCISCO (CBS.MW) - Ask not what a worm can do to your Internet. Ask instead what the fast-spreading Code Red can do for electronic security companies.

"It puts a spotlight on the security industry, but unfortunately it doesn't always make the Internet industry look good," said William P. Crowell, chief executive of California's Cylink Corp.
CYLK
and former deputy director of the U.S. National Security Agency in Washington D.C.

The Code Red Internet worm, having disrupted U.S. government Web sites last week, could slow down Internet traffic as soon as Tuesday evening, experts say. "This worm . . . affects big 18-wheel trucks," said CBS News technology consultant Larry Magid. "If all of the 18-wheel trucks started slowing down in traffic, we would be affected if we were behind them in our car." See Code Red report.

Most Internet security shares in U.S. trading Tuesday rose, some as much as 8 percent. One analyst, U.S. Bancorp Piper Jaffray's C. Eugene Munster, said Tuesday he was recommending shares of VeriSign
VRSN, +0.80%
and Check Point Software Technologies
CHKP, +0.73%

"I just got lucky with the Code Red," says Munster, who initiated coverage of several electronic security companies. Munster says he had no intention of timing his Wall Street research report with news reports about Code Red. "Every three months or so there is some major event that throws these companies into the spotlight."

To be sure, with the exception of anti-virus maker Network Associates and Symantec, which makes software that protects companies from e-mail attacks, electronic security companies have mostly declined in value since January. A wave of earning warnings from technology companies in general led investors to conclude that security providers were vulnerable to an economic slowdown. See earlier Thom Calandra's StockWatch.

Some electronic security stocks, like Internet Security Systems
ISSX
have been crushed. The Atlanta-based company's Nasdaq stock has lost two-thirds of its value since the start of the year, bringing the market capitalization to $1 billion. Internet Security Systems, which specializes in intrusion detection, is suffering from flat sales and earnings and is in cost reduction mode.

Most researchers say the expense of maintaining a secure network is a priority. IDC, the data researcher, estimates the U.S. information security services market will grow to $8.2 billion in three years from $4.3 billion this year.

The robust projection is not helping security software companies.

In Minneapolis, Munster says investors are only interested in companies with yearly sales in the hundreds of millions of dollars. It helps if they have major upgrades in the works, like a new product from Check Point, the analyst says.

A developer of corporate fire walls, Check Point could grow sales by 30 percent yearly as wireless, broadband and Internet delivery of data and text expose weak spots in computer networks, Munster said. The Israeli company is one of the largest providers of security software.

Check Point NG (for Next Generation), a firewall product, starts shipping this summer. Munster sees $685 million of yearly sales for Check Point. Other investment banks have higher targets. If the company, the largest security company by market capitalization ($10 billion), meets Munster's one-year profit target, the stock will sell for 29 times earnings.

"My price target is 1.2 times growth," Munster says. "A company with an upgrade cycle like Check Point, in the midst of a terrible stock market, is a positive," he says. The analyst thinks $55 is a logical price for Check Point stock, which sells now for $45 on Nasdaq.

At tiny Cylink in Santa Clara, Calif., Crowell says never-ending reports about server and computer desktop worms and viruses are the reality of doing business on the Internet. "It shows that the Internet continues to be a place that to the general public looks unsafe," said Crowell, who spent 34 years at the National Security Agency, which protects federal information systems. His observations on the security vulnerabilities of private and public sectors cast Crowell as a kind of James Bond for network security issues.

"When it comes to business, all of these worms and viruses have a chance to be disastrous," said Crowell. "You can't get through Web-based life without at least three forms of security: filters, encryption and strong authentication."

One researcher, META Group, expects security budgets to grow as much as 50 percent a year this decade. Almost 5 percent of all corporate technology spending will be devoted to security concerns by year's end, up from 1 percent, the Connecticut-based META Group says.

Tibco update

Tibco Software
TIBX
Chief Executive Vivek Ranadive says First Call estimates for the integration software company call for $340 million of sales this fiscal year vs. $252 million last year. The California-based company this week unveiled a contract with the largest holder of third-generation mobile licenses in Britain, Hutchison 3G UK.

Tibco's software will enable Hutchison's various companies to receive more than 100,000 messages a second as consumers employ mobile phones and other handheld devices that have always-on Internet access.

Yet Tibco shares in the past week have declined. The company sees no reason for alarm, a spokeswoman said Tuesday. In a StockWatch article last week, Ranadive, Tibco's founder, said he expects business from retailers, energy companies and manufacturers to keep sales growing rapidly. Tibco shares Tuesday afternoon sold for $8.85, down from $11 when the article appeared July 25.

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